Message from the Board of Directors

Five Years Later: A Perspective on SIPC and the Financial Crisis

The financial crisis of 2008 propelled SIPC
into the most important cases in the Corporation’s
history. Five years later, we are in a
position to evaluate SIPC’s role in that crisis.
We believe SIPC fulfilled its statutory mandate,
and had a critical role in promoting investor
confidence at a time when the nation’s financial
system was in great jeopardy.

Lehman Brothers Inc.

The Lehman insolvency was the largest bankruptcy
of any kind in history. Immediately after
the United States District Court approved
SIPC’s application to place Lehman Brothers
Inc. (LBI) into a SIPA liquidation proceeding
on September 19, 2008, the United States
Bankruptcy Court convened a hearing to
transfer LBI’s customer accounts to other brokerage
firms so that individual investors could
make investment decisions concerning their
portfolios. The trustee transferred 110,000
retail customer accounts containing $92 billion
in short order. This was absolutely critical
to investor confidence at a time of great price
volatility in the markets.

The trustee for LBI then set about the business
of liquidating the firm. Litigation ensued
on many fronts. There were substantial disputes
as to which of the many international Lehman
entities was entitled to any particular asset.
There were disputes as to the nature and extent
of SIPC’s coverage of certain investments. Many
of those issues have now been resolved. LBI’s
liquidation has now reached a point where the
trustee has noted that SIPC’s funds will not be
necessary to either replace customer assets, or
to satisfy administrative expenses.

Commenting on the scope of the case
when he confirmed the investment bank’s liquidation
plan, Bankruptcy Judge James Peck
called it "the biggest, the most incredibly
complex, the most impossibly challenging international
bankruptcy that ever was."

Lehman Brothers Holding Inc., parent
company of the SIPC member brokerage firm,
reached agreements which made it possible
to settle creditor claims over time. Judge
Peck noted that "the interrelated settlements
that have been presented today on a consensual
basis are truly remarkable and represent
a comprehensive consensual resolution of one
of the most complex matters ever to be resolved
in history frankly, at least in the commercial
sense."

Bernard L. Madoff Investment Securities LLC

The failure of Bernard Madoff’s firm in December,
2008 was radically different from the
failure of LBI a few months before. Madoff
ran the largest, longest running ponzi scheme
in history. An account transfer, such as was
effected in the LBI case, was impossible. The
books and records of the brokerage were a fiction.
The trustee for the liquidation, working
with SIPC, received court approval to value
customer accounts on a “money in minus
money out” basis, which had been used in
previous ponzi schemes in SIPA cases. That
methodology was litigated through the federal
court system and affirmed.

The trustee simultaneously began an investigation
into the decades-long scheme run by
Madoff. Facts revealed in the investigation led
the trustee to commence a large number of lawsuits.
At the start of the liquidation the trustee
took custody of approximately $860.0 million
in cash and proprietary securities. By litigation,
settlement, sales of assets and other means,
the trustee has, to date, recovered an additional
almost $9.0 billion. Currently any customer
with a net cash position of $875,000 has been paid in full, and a customer with a net position larger than that has received 42.867% of their respective claim from "customer property," and up to an additional $500,000 in advances from SIPC. Additional distributions will ensue as litigation resolves outstanding issues and as additional funds are added to the "customer property" estate.

In addition to the approximately $9.8 billion recovered by the trustee, the United States Attorney used criminal and civil forfeiture proceedings to recover an additional approximately $4.0 billion. The US Attorney was able to use information gathered in the trustee’s investigation that will enhance the distribution to Madoff victims. While the universe of "customers" in the SIPA case is not the same group of persons who will receive distributions from the forfeiture fund, there is considerable overlap. This was an impressive example of two different entities collaborating and acting in the public interest to benefit the victims.

We would be remiss if we did not mention Judge Burton Lifland, who presided over the Madoff case. Judge Lifland passed away in January 2014. He was a legal scholar who knew the law well, and also knew that the consequences of his rulings affected the lives of many people. In the Madoff case, he presided over difficult issues with a distinctly compassionate touch.

MF Global Inc.

MF Global was placed in a SIPA liquidation on October 31, 2011. This proceeding was the eighth largest bankruptcy in history. Although most of the account holders at the firm dealt in commodities, as opposed to securities, the securities customers were at risk because the firm did not have sufficient liquid assets to continue operating the business. SIPC initiated the proceeding on the same day the United States Securities and Exchange Commission informed SIPC that the conditions at the firm required SIPC to act.

The trustee for the firm was able to transfer securities customer accounts in short order. Commodities customer accounts, which cannot be supplemented with SIPC funds, were satisfied in increasingly larger amounts as the financial condition of the firm was determined.

In November of 2013, Bankruptcy Judge Martin Glenn signed an order authorizing the payment, in full, of money owed to commodity customers, both in the United States and abroad. The Judge noted that "I don’t know of anyone who thought when the case started that the foreign and domestic commodity customers would be looking at 100% recoveries."

Once again, as in the Lehman Brothers case, it has been determined that SIPC's funds will not be necessary to supplement payments to customers, nor will it be necessary for SIPC to make advances for administrative expenses.

Subsequent Proceedings

Since the failure of MF Global, SIPC initiated four much smaller customer protection proceedings in 2012 and 2013. One of those proceedings was sufficiently small to use the “direct payment procedure” authorized by SIPA, and the other three cases were eligible for SIPC to serve as trustee.

Achieving these impressive results these past five years was due in no small measure to the extremely capable and committed management and staff. Their dedication is greatly appreciated.